BASIC STRATEGY GUIDE: STEP 28

Activity Four:
Manage the Company’s cost structure to create Economies of Scale while offering good value to Core customers.

Step 28: Evaluate Economies of Scale in each functional cost department.

• Audio Tip #166: Introduction to Basic Stategy Guide Step 28

What:

Measure the Economies of Scale (i.e., Productivity, Inputs/Outputs, over time) the Company is creating with its employees (Inputs). The Company tracks the Economies of Scale, measured by numbers of employees per unit of Output, in each organizational unit of the Company over a period of years. The Company may expand this analysis to do similar Economies of Scale estimates for the other two Input Building Block costs, Purchases, and Capital.

• Audio Tip #195: Economies of Scale and Their Measurement

Why:

In the majority of industries, People are the most important of the Company’s Building Block costs in the measurement of Economies of Scale. The Company would be more likely to achieve its optimal Economies of Scale by having the capability and will to measure the Productivity of its functional cost departments regularly.

What to Watch For:

• In most cases, a period of three years is sufficient to measure the development of Economies of Scale.

• Each functional cost department should be creating Economies of Scale unless the Company is significantly changing what it is doing or investing heavily for the future.

• Audio Tip #196: Why Economies of Scale Exist

• Audio Tip #191: Sustainable Economies of Scale

• Neither Super-economies nor Diseconomies of Scale are sustainable over the long term. Super-economies are usually short term phenomena brought about by new technology. Diseconomies are more common and can be longer lasting, if not addressed.

• Audio Tip #199: Super-economies of Scale

• Audio Tip #198: Diseconomies of Scale

• In most industries, the industry market share leader does not lead the industry in Returns on Investment. In order to create effective Economies of Scale, a company must set aggressive targets for increases in Productivity.

• Audio Tip #197: Market Share and Returns

Action:

Use Productivity measures to set cost targets for each functional cost organization. Then use these measures to improve the Economies of Scale the Company’s sales volume growth creates.

• Self Test #28: Evaluate Economies of Scale in Each Cost Function

• Worksheet #28: Evaluate Economies of Scale in Each Cost Function

More Information on Evaluating Economies of Scale in Each Functional Cost Organization on the Advanced Site

For helpful context on this step:

Videos:

• Video #75: Overview of Costs Part 1: How to Look

• Video #76: Overview of Costs Part 2: What to Expect

• Video #77: Overview of Costs Part 3: What to Do

• Video #52: Economies of Scale and Acquisitions

• Video #53: Productivity and Economies of Scale in Hostility

Perspectives:

• “Getting Bigger, Getting Smarter”

• “Is Bigger Really Better?”

• “Making Acquisitions Work in Hostile Markets”

• “Rare Mettle: Gold and Silver Strategies to Suceed in Hostile Markets”

• “Success Under Fire: Policies to Prosper in Hostile Times’

Symptoms and Implications:

• The industry is adding new, more efficient capacity in the effort to reduct costs

• Outsourcing is a growing phenomenon in the industry

Guide Index

NEXT: Basic Strategy Guide Step 29